Here's some content we wrote just for you! Got an idea for a blog article?Shoot us an email.

American consumers have an intimate relationship with their credit cards. Most don’t really understand the numbers that drive this business for the banks that issue the cards, or who pays the “freight” to keep it going, especially at car dealerships. This article will provide an overview of who pays what to whom, and how much they pay. You will be surprised.

The average American has 2.6 cards and is accustomed to using a credit card for a variety of purchases. If one excludes the 29 percent of the population that does not have a card, then the average person with a card carries 3.7 cards. About 27 percent of those people use a cash rewards card while another 21 percent use a miles rewards card. Not surprisingly, people making over $75k per year prefer using credit cards and people making less prefer debit cards. Also, and perhaps not surprising, about 38 percent of the second group cannot afford to pay off their balance in full when they get their monthly statement, so they “revolve” the balance (the term comes from the old revolving-credit department store branded card).

This is a big business. Total revolving credit card debt is now approaching one trillion dollars! It is also a business of scale. While there are close to 5,000 commercial banks in the country, the top four banks issue 57 percent of all cards, and altogether, the top 10 banks issue fully 90 percent of all cards.

What Interest Rate Will Consumers Pay if They Revolve Their Card Balances?

Current figures show the average interest rate from the major banks is 17.14 percent. This is pretty shocking when you find out that the average Federal Funds rate these banks use for buying or selling excess reserves to the Fed is only 2.2 percent. This is the bank’s cost of funds. You have probably noticed that this is similar to the rate that your bank will pay you on your balance in a savings account, around two percent.

By now you are likely saying to yourself, “Wait a minute, are you telling me that my bank is buying money for two percent and loaning it out for 17 percent?” The answer is an unqualified “Yes.” This makes issuing credit cards one of the most profitable products for a bank.

What Are the Pros and Cons of Credit Cards for Banks?

Financial analysts measure bank performance by looking at Return on Assets (ROA). A well-managed commercial bank will have an ROA that is a bit more than one percent. The 10 banks that issue credit cards typically see a four percent ROA in that business line. Yes, it is a business of scale, and yes, banks have plenty of cards that are delinquent or that they have to write-off, but that is a part of their business model, a cost of doing business.

Part of the reality is that these banks are chasing the biggest users. (Business travelers on expense account who fly business class, stay in nice hotels, and rent cars typically travel at the last minute and pay the highest fares using rewards cards that pay out more and more.)

Remember when Chase launched their Sapphire Card? The initial offering was 100,000 bonus points, a guaranteed 1.5 cent per point travel redemption value, and a $300 travel credit. You have to ask yourself, “How can Chase afford to do this?” The answer is: they can’t, at least not in perpetuity.

They are fixated on volume, as large banks always are, and not on profitability. So to make this work, they have to go down the credit ladder and approve more consumers at the lower end of the scale since they will more likely revolve their balances. Now the bank is taking on more credit risk to cover the costs of attracting business travelers. You can ask yourself if you think this is a good long-term business strategy.

What are the Pros and Cons of Credit Cards for Car Dealerships?

Now let’s look at what happens when you go into a new car dealership and find exactly the car you want at the price you want. The car is on the lot; you take it for a test drive; and now you want to drive it home. This is exciting, isn’t it!

Well, if you have a Chase Sapphire card, naturally you want to use the card to buy the car — either for a full purchase or for the down payment — because that will pay for your next vacation. What do you think the car dealership is going to say about it?

To answer this, we have to take a look at how new car dealerships make their money. Most consumers think that dealers make a lot of money selling a new car (hence the term “stealerships”). But it turns out that new car dealers make most of their money on fixed operations (aka “fixed ops”) which are the parts and service departments.

Looking at the 10-K (a comprehensive summary report filed with the SEC) for one of the largest publicly traded auto dealerships, their average gross profit is about $1,850 on a new car and $1,350 on a used car. That might seem like a lot of money, but let’s put things in perspective.

Running a new car store is expensive. The average dealer has invested almost $12 million dollars in their store, and the average dealer has operating expenses north of $5 million dollars a year – checks they have to write to keep the doors open. This includes buying or leasing the land (sometimes a lot of land), building and maintaining the facilities to the stringent standards set by the manufacturer, putting inventory on the lot, building out the service center, and having working capital. The gross profit from the sale of new cars hopefully covers the operating expenses, and the actual profits will be made from fixed ops and used car sales.

Do Car Dealerships Prefer Checks for Down Payments?

The average new car is around $35,000. Let’s say you wanted to do a full purchase with your Chase Sapphire card. The dealer is going to pay their card processor a discount rate of at least three percent, which in this case would be $1,050 (i.e. over half their gross margin).

Naturally, they are not going to do that. Even on a down payment, which might be 20 percent of the purchase price, the discount rate would be over $200.

Now you can see why car dealerships are reluctant to take credit cards, particularly a rewards card, for an automobile sale and why checks are the preferred method of accepting down payments.

What is the Best Way to Make Down Payments at Car Dealerships?

In many cases, consumers will not have all the money needed to make a down payment, but they would be able to come up with the money if given an extra 30 days. This is where CrossCheck’s Multiple Check service with Remote Deposit Capture comes in.

Consumers write 2 – 4 checks with the same purchase date on each check, and tell dealerships when to deposit them in the future.

Dealerships run the checks through imagers supplied by CrossCheck and give the checks back to the check writers.

Dealerships send the check image to CrossCheck for processing.

Dealerships received guaranteed funding as each check is electronically deposited by CrossCheck on behalf of dealers (Correctamundo! CrossCheck does the banking.). We typically charge less than one percent to do this, a small fraction of what car dealerships would pay if they took credit cards.

Dealers only receive funding to their bank accounts after each check is deposited.

When CrossCheck guarantees a check payment, the dealer has peace of mind knowing they will be paid even if one of more of the checks bounce. We also give the consumer peace of mind by buying now and paying later — versus falling into a “debt trap” where they are revolving their purchase at an interest rate of 17 percent for years to come.

As you can see, using CrossCheck is a win-win for consumers as well as car dealerships, and it gets both parties out of paying egregious fees. We have proven this over the last 35 years. What could be better than that, except driving off the lot in your new car?

Download our free guide to learn how Multiple Check can help your dealership reduce risk and increase sales while saving time and money.